midterm review

Question 1

1. When the dollar is worth more in relation to currencies of other countries, are you more likely to buy American-made or foreign-made jeans? Are U.S. companies that manufacture jeans happier when the dollar is strong or when it is weak? What about an American company that is in the business of importing jeans into the United States?

Answer 1

When the dollar is strong, american consumers are more likely to buy foreign made jeans bc stronger dollar makes foreign jeans cheaper, decrease for us dollars
US manufacturing companies are happier when dollar is weak bc weak dollar makes their exports more competitive in foreign markets bc their jeans become cheaper for buyers using other currencies
Companies importing jeans benefit from strong dollar

Question 2

2. What effect might a fall in stock prices have on business investment?

Answer 2

Less investment

Question 3

3. Explain the main difference between a bond and a common stock.

Answer 3

The main difference between bond and common stock is that a bond is a debt instrument and a stock is an equity instrument. Bonds by in coupons, stocks pay in dividends
With a stock you are entitled to: voting rights and dividends
Bonds generally less risky than stocks

Question 4

5. Can you think of a reason why people in general do not lend money to one another to buy a house or a car? How would your answer explain the existence of banks?

Answer 4

Risk, banks originally where just a place to store money but evolved into more so now take on the risk of lending, but gather more information before ending so less risk

Question 5

1. What is the difference between a mortgage and a mortgage-backed security?

Answer 5

A mortgage is a loan that an individual borrows from a lender (typically a bank or a mortgage company) to purchase real estate, usually a home.
A mortgage-backed security is a type of investment that is created when a financial institution bundles together multiple individual mortgages and sells shares or interests in the pool to investors

Question 6

2. How can the adverse selection problem explain why you are more likely to
   make a loan to a family member than to a stranger?

Answer 6

Information asymmetry, lending to stranger you have limited information about their creditworthiness where as a family member you have information about them

Question 7

3. Calculate the present value of a $1,000 discount bond with five years to maturity if the yield to maturity is 6%

Answer 7

PV=FV/(1+r)^n
=1000/(1+.06)^5
= 747.26

Question 8

2. How might a sudden increase in people’s expectations of future real estate prices affect interest rates?

Answer 8

Increase interest rates because more demand for real estate now less demand for bonds which will lower bond prices which increases interest rates

Question 9

12. Suppose that people in France decide to permanently increase their savings rate. Predict what will happen to the French bond market in the future. Can France expect higher or lower domestic interest rates?

Answer 9

Lower interest rates
Increase in wealth, increase demand for bonds, increase price of bonds, decrease interest rates